Industry associations collaborate on new framework to offer best practice in response to growing demand.
Institutional investors are being offered practical guidance on aligning their securities lending activities with their ESG policies and principles.
The Global Framework for ESG and Securities Lending (GFESL) has been launched by the Pan Asia Securities Lending Association (PASLA) and the Risk Management Association (RMA). It has also been endorsed by the International Securities Lending Association.
According to the two industry associations, GFESL provides “standardised options, essential background and key considerations” across the six main areas of investment operations, as well as suggestions on best practice.
The framework was developed in response to a growing market need among asset managers and owners to ensure securities lending activities do not compromise their ability to use their proxy votes at investee companies AGMs, as well as other investment operations considerations, such as extending consistent ESG criteria to non-cash collateral.
Roy Zimmerhansl, Practice Lead at Pierpoint Alpha Community, recently told ESG Investor this is an area of increasing concern. “ESG-aware investors go to the trouble of buying shares that satisfy certain criteria but when they lend those shares out to make extra revenue they don’t necessarily assess the collateral the borrower puts up to ensure it is in alignment with ESG policies.”
GFESL also offers recommendations and guidance on selecting direct counterparties to ensure transparency in the lending chain and establishing a clear policy on lending securities over dividend record dates and communicating this with agent lenders.
Both PASLA and the RMA have conducted extensive research on investor needs and priorities. A total of 85% of asset owners and managers surveyed by PASLA favoured controls to address concerns over the compatibility of ESG principles with securities lending, while an RMA poll found that only 18% for investors always apply ESG principles to their securities lending programmes.
“It is essential that the market has a shared understanding of how ESG and securities lending intersect, as well as a common decision-making framework for managing these touchpoints,” said Paul Solway, Director, PASLA.
“The GFESL moves the agenda on to how we actually apply ESG principles in our market, providing valuable technical guidance to beneficial owners in particular,” said Fran Garritt, Director of Securities Lending, Market Risk, and Credit Risk at RMA.